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GCUREADINGS

MODULE 1

ACC250

Introduction All organizations need an accounting system in order to track there resources, claims against those resources, and effects of operations. The accounting information system is used to systematically record economic events and summarize them into financial statements. The financial statements of an organization can be used to evaluate an organization's operating performance, financial position, and cash flows, in order to make investment, credit, or managerial decisions.

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ACC250 MODULE 1

Financial and Managerial Accounting Accounting is defined as the "information system that identifies, records, and communicates the economic events of an organization to interested users" (Kimmel, Weygandt, & Kieso, 2009, p. 25). The communication of economic events is facilitated through the preparation of financial statements and other financial reports. Financial statements are the primary method used to communicate information about a company's operating performance, financial position, and cash flows to interested parties that may be internal or external to the organization. External users of financial statements may include present and potential investors or creditors, as well as governmental and other regulatory bodies. External users of financial information may review the financial statements of many different organizations, and as such, need the information about those entities to be presented in a standardized way. Internal users of financial information include managers and employees that are privy to information about the entity and, therefore, may not require as formal a presentation of information as the external users of financial information may need. The accounting discipline that focuses on the preparation of financial statements for external use is called financial accounting, and the accounting discipline that focuses upon the compiling of financial information for internal use in decision making is called managerial accounting. This course focuses on financial accounting and the preparation of financial statements.

Transactions and the Accounting Cycle The activities of a business can be classified as operating activities, investing activities, or financing activities. Operating activities are the events that create revenues and expenses. Investing activities include acquiring and disposing of investments and other long-term assets. Financing activities include obtaining funds from creditors and stockholders and repaying debt or paying dividends (Kimmel et al., 2009). The operating, investing, and financing activities of a business must be included in the financial statements, and therefore must be entered into the accounting information system. The accounting information system contains a collection of accounts. Accounts are established for any item that must be tracked separately in the accounting information system. Accounts can be classified into the following categories: Assets - the "economic resources owned by a company" (Libby, Libby, & Short, 2004, p. 9). The assets of the business may include cash, accounts receivable, inventory, buildings, equipment, or patents. Liabilities - the "company's debts or obligations" (Libby et al., 2004, p. 9). The liabilities of a business may include accounts payable, notes payable, interest payable, bonds payable or unearned revenues. Equity - "indicates the amount of financing provided by owners of the business and earnings" (Libby, et.al, 2004, p. 9). The equity of a business is the residual amount of assets leftover if all of the organization's liabilities were satisfied.

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ACC250 MODULE 1

The assets, liabilities, and equity of an organization are interrelated. The assets represent the total resources of a business, and the liabilities and equity of a business represent the total claims against those resources. Therefore, the accounting equation can be stated as: Assets = Liabilities + Equity Economic events of a business that affect the accounting equation are called transactions (Kimmel et al., 2009). In order to be included in the financial statements, transactions must be recorded into the accounting system as journal entries. Journal entries are entered into the General Journal. The General Journal contains a chronological listing of all of the events of a business that must be included in the financial statements. The accounting information system is called a double-entry accounting system because in order to keep the accounting equation in balance, each transaction must affect at least two accounts. Each account has two sides to it, the debit side (left) and the credit side (right). Assets have a normal debit balance, so to increase an asset account, it must be debited, and to decrease an asset account, it must be credited. Liabilities and stockholders’ equity accounts have normal credit balances, so to increase a liability or stockholders’ equity account, it must be credited and to decrease a liability or stockholders’ equity account it must be debited. Accounts that increase stockholders’ equity (investments, revenues, gains) act like stockholders’ equity in that they increase on the credit side and decrease on the debit side. Accounts that decrease stockholders’ equity (distributions, expenses and losses) act the opposite way of stockholders’ equity in that they increase on the debit side and decrease on the credit side. The following illustrations demonstrate these relationships:

Journal entries express the effects of a transaction on accounts in a debits-equal-credits format. The accounts and amounts to be debited are listed first. Then the accounts and amounts to be credited are listed below the debits and indented, resulting in debits on the left and credits on the right. After the transactions are entered into the journal, they must be summarized by account. The collection of accounts, including their activity and balances, is called the General Ledger. The process of entering the transaction data found in the General Journal into the General Ledger is called posting. After transactions

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ACC250 MODULE 1

are posted into the ledger and the balances in each account tallied, the balances are presented in a trial balance. A trial balance is a list of all accounts for an organization with their balances at a given point in time. The trial balance shows that the total debits and total credits are equal, or in balance. A demonstration of preparing journal entries, posting them to the ledger, and summarizing the balances into a trial balance, follows.

After the trial balance is prepared, the accounting records are adjusted and used as a basis for preparing financial statements. Accounting is defined as the "information system that identifies, records, and communicates the economic events of an organization to interested users" (Kimmel, Weygandt, & Kieso, 2009, p. 25). The communication of economic events is facilitated through the preparation of financial statements and other financial reports. Financial statements are the primary method used to communicate information about a company's operating performance, financial position, and cash flows to interested parties that may be internal or external to the organization. External users of financial statements may include present and potential investors or creditors, as well as governmental and other regulatory bodies. External users of financial information may review the financial statements of many different organizations, and as such, need the information about those entities to be presented in a standardized way. Internal users of financial information include managers and employees that are privy to information about the entity and, therefore, may not require as formal a presentation of information as the external users of financial information may need. The accounting discipline that focuses on the preparation of financial statements for external use is called financial accounting, and the accounting discipline that focuses upon the compiling of financial information for internal use in decision making is called managerial accounting. This course focuses on financial accounting and the preparation of financial statements. 2004, p. 9). The equity of a business is the residual amount of assets leftover if all of the

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ACC250 MODULE 1

Financial Statements The output of the accounting process would be financial reports, and more specifically, financial statements. There are four required financial statements for a corporation: the income statement, statement of retained earnings, balance sheet, and statement of cash flows. The financial statements are presented, along with notes to the financial statements, to internal and external users of accounting information to indicate the operating performance, financial position, and cash flows of the organization. The income statement presents the revenues earned and expenses incurred during a period of time, usually a month, quarter, or year. The difference between revenues and expenses is called net income, or profit. If the expenses exceed the revenues, the organization has a net loss. Revenues and expenses affect the overall equity of the organization. The statement of retained earnings presents the change in equity for the period that results from the entity having net income or net loss, and distributing profits to stockholders in the form of dividends. The balance sheet demonstrates the accounting equation by showing that the balances in the asset accounts are equal to the total balances in the liabilities and equity accounts. The balance sheet is shown as of one single date in time, usually the last day of the period that the income statement covers. The purpose of the balance sheet is to report the financial position of the organization as of a particular point in time (Libby, et.al., 2004). The statement of cash flows shows how cash was provided or used by operating activities, investing activities, and financing activities throughout the period.

Generally Accepted Accounting Principles Since the financial statements are oftentimes presented to external users of accounting information, such as present and potential investors or creditors, it is important that they are prepared in a standardized way that is recognizable to the users. The rules that must be adhered to when preparing financial statements are called Generally Accepted Accounting Principles, or GAAP. GAAP is developed by the Financial Accounting Standards Board (FASB) with input from the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants (AICPA). The following illustrates the conceptual framework of accounting, as expressed by GAAP. The underlying assumptions, principles, and constraints of GAAP must be applied in developing financial statements that are useful to external users.

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Conclusion An organization's operating performance, financial position, and cash flows can be assessed by reviewing the financial statements for the period. A company's financial statements are the ultimate output of the accounting information system. In order for the financial statements to be useful to internal and external users of accounting information, they must be prepared in accordance with GAAP.

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Kimmel, P., Weygandt, J., & Kieso, D. (2009). Accounting: Tools for business decision making (3rd ed.). Hoboken, NJ: John Wiley & Sons, Inc. Libby, R., Libby, P., & Short, D. (2004). Financial Accounting (4th ed.). Boston, MA: McGraw-Hill Irwin.

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GRAND CANYON UNIVERSITY

ACC250 MODULE 1

References

ACC250  

Entry Level Accounting

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